Marks and Spencer Financial Analysis, 2016

Marks & Spencer (M&S), a public limited company, is one of the United Kingdoms multinational retailers in
food, clothing and home products. It is headquartered in Westminster, London (LSE: MKS OTCQX: MAKSY).
M&S has more than 1,382 outlets and over 80,000 employees across the globe. Its strength lies in ever growing
32 million loyal customer base and unconditional quality assurance through its own branded labels. The
business model focuses on creating long term relationship by effective utilization of resources and relationships
with both customers and investors. Marks & Spencer is one of very few in the retail industry that has remained
consistent in yearly dividend payments to stakeholders.
Marks & Spenders main strategic objectives are driving growth, reaching customers and improving
profitability. The overall performance in 2016 was a mixed bag, while there was good show in Food and a
significant improvement in the Clothing & Home margins yet the sales for clothing and home were below
expectations. The groups revenue for the year stands at 10.4 billion with a 0.8% increase compared to the last
year mainly driven by the strong performance in the food business. With respect to the second strategic
objective of reaching customers, there is a 0.2% sales growth in the food business along with a 3.9% space
growth by opening 25 owned Simply Food stores, 50 new franchise locations and seven new full line stores.
Coming to the third objective, profitability, while the groups revenue is almost stagnant, profit has taken a huge
hit resulting in a net income of 406 million from 487 million contributed by the non underlying items of 200
million and an increase in the selling, general and administrative expenditure as a percentage of sales from
26.72% to 26.87%. International business suffered due to currency flux situation owing to the global slowdown
alongside some operational challenges.
Board recommended a total of 23.3p dividend including interim, final and special dividend to the shareholders
which is up by 5.3p from last year increasing the book value per share to 5.43 from 5.01 last year. Its positive
dividend payout culture is remarkable since very few of the retail companies do so, which makes it a highest
ranked dividend per share growth company compared to its competitors hence the favorite amongst the
investors of this industry. The cash flow stood strong at 539.3 million, up by 2.9% on last year owing to the
increase in EBITDA and decreased capital expenditure. Company follows a strong culture of returning the
surplus cash generated to the stakeholders on a regular basis resulting in a Share buyback programme, which
returned 150 million to shareholders through purchasing 31.6 million shares. It spent 576.10 million on
investing activities and also paid 631.40 million in financing cash flows. The good sign is that the Companys
free cash flow as a percentage of sales has increased from 5.61% to 6.27% while the capital expenditure has
reduced from 6.79% to 5.2%.

Ratios
Ratio analysis to compare the revenues and other indicators across two years, M&S has gained 10.31billion in
2015 growing to a 10.54billion in 2016 and has planned to continue growing at a higher rate in the coming
years.
Gross Profit ratio is 39.1% this year compared to 38.7% in 2015 indicating a good margin sales or lowered
production cost. It also signals towards marketing effectiveness.
Operating Profit Ratio has come down from 6.80% to 5.53% owing to increase in other operating expenses.
Return on capital employed has come down from 13.55% to 10.70% indicates less efficient use of capital.
Earnings per share growth are at 5.74% up from 2.80% last year indicating a good financial performance.
Dividend yield stands strong at 4.52% compared to last year 3.25% whereas dividend per share is at 6.98%
compared to 1.18% in 2015.
Current ratio is 0.69 which less than a 1 which means the company still needs more liquidity for set off current
liabilities. The net current assets stand at -643.40m improved from last years -656.60 but the ideal current
ratio must be at least 2 which mean the current asset needs to be double to meet the current liabilities.
The price to earnings ratio stands at 13.47 today down from last years 16.01 indicating overall downward
trending market sentiments.
Gearing ratio is 52.96% down from 56.86% in 2015. This ratio alarms on long term capital structure, higher
borrowings means higher gear and the higher the level of gearing, the greater the risk.
All of the above ratios have indicated mixed reviews on companys performance. While the growth of the
company has almost been stagnant over the years however at the same time it has not shied away from
maintaining their investor relations and made the yearly dividend payment of 18.40% (interim 6.8% + 11.9%
final) along with a special dividend of 4.6%. Fundamentally, the company doesnt believe in short term gains
bargained with quality compromises. It caters to the niche market with best in class products keeping in mind
customers dynamic changing needs and trusts in continuing to do so with its quality commitments.
The consumer confidence index, which showed a peak at the beginning of the year, declined at the tail end of
the year due to various factors especially the macro economic factors including Brexit. The unsettling feeling
among the consumers on account of such issues is leading to subdued consumer spending behavior. Consumer
confidence weakened in the run-up to the EU referendum, it is too early to quantify the implications of Brexit

Steve Rowe, The new CEO of the company said in the statement to The Independent, a British
online newspaper.
Companys International business with a total of 468 wholly-owned, jointly-owned or franchised stores across
59 countries in Europe, Asia and Middle East, earned a revenue of 1.1 billion in the year 2016. The
international business suffered a great deal of business and customers in 2015 due to global uncertainties,
currency fluctuations, geo political instability, decreased profitability etc which lead the closing of 12 stores.
The Competitors such as Tesco, Aldi, or Asos are following discounted pricing strategies which are resulting in
short term loss of sales volume however increasing long term consumer confidence with M&Ss belief in
quality and value for money products for consumers. India and Hong Kong are the two key markets where the
company has maintained its market share with these strategies.
While retail industry does not call for the threat of new entrants easily due to a large capital investment
requirement, customer loyalty and others factors, M&S is facing new entries in both Food and Clothing
business targeting the M&S loyalist with similar products in lower price offerings. On the other hand, the
fashion oriented brands such as H&M, Gap, Zara are aiming at the younger generation with affordable price
range.
In the industries within which M&S operates, customer's bargaining power is high. Several shifts in the
consumer market such as the increasing price sensitivity of customers seeking classical designs, increasing
preference for fashionable items or the disloyalty of UK consumers to British products are increasingly
affecting the retailer (Cunningham, 2016). Marks & Spencer has suffered its biggest fall in clothing sales since
the 2008 banking crisis as new boss Steve Rowe tries to end its reliance on heavy discounting (Zoe Wood and
Sean Farrell, 2016). All fashion retailers are facing tough trading conditions as UK clothing sales are falling
for the first time in six years, while the poor weather has also dampened demand for summer ranges said Mr
Rowe.
Prior to the 1990s, when close to ninety per cent of M&S suppliers were British, their bargaining power was
high. However, post the 1990s M&S experienced a rapid decline in sales and was forced to outsource globally
and work with overseas suppliers who offered much more competitive pricing. The move resulted in a
considerable decline in the bargaining power of its British suppliers (BBC, 2013) and therefore, the bargaining
power is lower while the brand image gives them the customer loyalty and their share of power to bargain.
Conclusion
Beginning in the 1990s and more recently as a result of the recession in 2009, the company has faced both a
decrease in sales as well as increasing competition from online retailers, discounters, fast fashion brands and

others in both its clothing and food businesses. The former, once the flagship of the company, has suffered a
considerable decrease in its market share over recent years and reached a ten-year low in terms of sales in the
second quarter of 2016 (Davey, 2016).
The Company is facing various issues currently despite it being a strong brand and superior image owing to
micro and macro economic factors. The weak consumer confidence index and currency fluctuations have had an
adverse impact on the sales growth of the company.
It may need to restructure its supply chain once it loses access to the EU's open market and UK citizens working
in stores in the EU as well as EU nationals employed in UK stores may be affected when the freedom of
movement of workers is no longer applied in the UK (Dentons, 2016). It is at the same time known for best
investor friendly company where it has a proven track record of ever growing dividend payouts.

References:
BBC. (2013, April 11). Marks and Spencer food sales offset clothing weakness. Retrieved July 2016, from
BBC: http://www.bbc.com/news/business-22104228
Cunningham, T. (2016, May). The week ahead in business and finance. Retrieved July 2016, from The
Telegraph: http://www.telegraph.co.uk/business/2016/05/22/the-week-ahead-in-business-and-finance/
Dentons. (2016). Key Legal Brexit Issues for Retailers. London: Dentons.
Marks & Spencer. (2016). ANNUAL REPORT & FINANCIAL STATEMENTS, 2016
http://annualreport.marksandspencer.com/M&S_AnnualReport_2016.pdf
Marks and Spencer sales slumped ahead of Brexit vote
http://www.independent.co.uk/news/business/news/marks-and-spencer-sales-food-brexit-eu-referendum-marcbolland-a7124336.html

http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?
fourWayKey=GB0031274896GBGBXSET1

Ruddick, G. (2013, October 24). Should M&S give up on clothes and focus on food? Retrieved July 2016, from
The Telegraph: http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10403348/Should-MandSgiveup-on-clothes-and-focus-on-food.html
Ruddick, G. (2016, July 7). Welcome to the M&S merry-go-round. Retrieved July 2016, from The Guardian:
https://www.theguardian.com/business/2016/jul/07/welcome-to-the-ms-merry-go-round
Zoe wood and Sean Farrell, G. (2016, july 7). Marks & Spencer suffers biggest clothing sales fall in 10 year
https://www.theguardian.com/business/2016/jul/07/marks-spencer-suffers-big-fall-in-clothing-sales